Living in debt can be a stressful situation. Most people find it hard to get out of debt once they get started on it. Paying off debt in a timely manner seems to be the common issue. High interest loans and high interest payments can put a strain on your financial situation. As long as you’re living with high interest debt it can be difficult to get ahead financially. If you think this applies to you, you are certainly making one of these common mistakes.

1. Only making minimum payments

The minimum payment is the lowest amount you have to pay on your credit card or loan to keep it in good standing. The minimum payment can either be a flat rate, a percentage of your balance or a combination of both. The amount is usually low compared to your total loan balance. It might not be evident to everyone that only making minimum payments on your loans takes you a lot of time to pay off your debts. Because this amount is low, it can be tempting to only pay the minimum payment. However, paying more than the minimum payment will help you pay off your debt faster. Which in turn will be saving you money on interest.  So it’s important to make an effort and pay more than your monthly minimum so you can get out of debt faster.

2. High interest rates

Credit card loans, especially have the highest interest rates. Not only do high interest rates affect the amount of interest you pay on your overall loan, they also affect how long it takes to pay off your loan. This is because a good chunk of your money is paying for the interest first. So, it’s important to be aware of the interest rate you are getting on your loans and if possible try getting the lowest possible rate. By avoiding high interest rates on your loans, you make it easier on you and on your budget to pay off your loans quicker.

3. Living beyond your means

This common mistake is usually the culprit when it comes to why a lot of people are indebted and can’t seem to get out of debt. You always need to make sure you don’t spend more than you earn. By making your budget every month, you can find out how much money you make and can allocate every dollar you earn efficiently. This way, you know exactly how much you can spend in a given month.

One of the worst things you can do to negatively impact your finances is to compare yourself to others or buy things you don’t need in order to impress people. Self restraint is very important when it comes to personal finance. It really doesn’t do you any good if you’re great at making your budget every month but don’t follow it. So, try to stick to your budget as much as you possibly can or at least avoid spending more than you make and you’ll do better than the average person financially.

4. Not paying your bills on time

Another reason why you can’t seem to get out of debt would be because you don’t pay your bills on time. You can incur extra fees and penalties if you don’t pay your bills on time and this can also affect your credit score negatively. By avoiding these extra fees and penalties you have more money to put towards your debt payments and you will be debt free faster.

5. Not having an emergency fund

Another reason why you might not be able to get out of debt would be because you don’t have an emergency fund. Having an emergency fund is important because it allows you to be prepared in the event of an unexpected expense. Emergencies can happen at any time in your life. Your car may need repair at some point or you might need a new roof or need to fix plumbing issues in your house.  So, it’s important to be financially prepared for when this happens. By having an emergency fund, you are not only financially prepared to take care of your unexpected expenses but you also avoid using your credit card or adding on to your debt.

Because your job isn’t foolproof, you should also be prepared in case you lose your  job and your income. As a rule of thumb you should aim to save about 3 to 6 months of your monthly living expenses. This will help you survive while you find another job and will prevent you from getting into debt. Your emergency savings always need to be in a readily accessible savings account. Don’t go investing this amount or locking it in a Guaranteed Investment account. You need to be able to have access to it right away when you need it.

6. Not paying attention to your finances

Part of being a financially responsible person is knowing everything you spend your money on and finding ways to cover every one of your expenses with money you’ve already earned. By paying a close attention to your finances you know when you owe income tax and should aim to avoid tax surprises. Any tax debt that goes unpaid accrues penalties and interest. The longer your balance stays unpaid, the more it’s going to cost you. You should always stay on top of your finances and know the amount of tax you owe. If you’re not sure how this works, contact an accountant and always make sure you do your taxes on time to avoid any penalties.

7. Buying a new car

After mortgages, Car payments are one of the most common things people take big loans for.  The average car payment in Canada is about $536 per month. With high gas prices and insurance, owning a car is becoming more and more expensive. Add to that all the unexpected maintenance on a car and you got yourself a high monthly expense that can put a strain on you financially.

Think hard before committing to that high car payment. Do you really need to buy a new car? Or can you find a used one you can buy cash that would work just fine and prevent you from getting a car loan? You need to understand that cars are one of the worst assets to get a loan for. By borrowing money to buy a car, you pay interest on a depreciating asset, meaning that the car is losing value over the years while you’re still paying for the loan. On top of this, many people trade in their cars every two or three years and lose money on every trade. Which makes it very difficult to get out of debt.

Bottom line

Debt isn’t all bad. There is good debt and bad debt. Without debt we would not be able to get things like mortgages and car loans. The real issue is the fact that most people are unable to pay off debt fairly quickly to avoid high interest payments. Think carefully before contracting new debt. If you follow these tips and avoid these common mistakes, you’ll be able to be in control of your finances.